What the deficit reduction plan means for Wyoming

An ambitious deficit-reduction plan released Friday by the 18-member National Commission on Fiscal Responsibility and Reform failed to receive the 14 votes required to force a vote by Congress on its recommendations.

But with 11 commission members backing the plan, including key congressional leaders and Budget Committee members, elements of the proposal are likely to show up in next year's budget package, said commission co-chair Alan Simpson of Cody, a former U.S. senator.

Simpson and others on the commission have made no effort to downplay the hardship that will result from implementing elements of the proposal, titled “The Moment of Truth,” aimed at reducing federal budget deficits by nearly $3.9 trillion over the next 10 years.

How those recommendations, if adopted, would affect Wyoming remains to be seen. But the loss of key income tax deductions are likely to hit oil and gas producers as well as the coal industry.

The elimination of 175 or more tax expenditures would require that some of America's wealthiest pay more, Simpson said. That would mean much higher income taxes in Teton County, where the average per capita income is $132,728, the highest in the nation.

But the plan could also have “serious consequences” for middle-class residents everywhere, including in Wyoming, according to Rep. Jan Schakowsky (D-Ill.), a commission member, who voted against the proposal.

The plan calls for a combination of spending cuts, tax hikes and fundamental tax reforms to trim $3.89 trillion from federal budget deficits over the next decade. Many measures would not kick in until 2012 or 2013, to allow the economy more time for a growing recovery.

The tax code would be vastly simplified, and individual and corporate rates would be lowered, with many deductions eliminated or limited. That includes converting the popular home mortgage interest deduction into a 12 percent tax credit on primary-residence mortgages capped at $500,000.

Employer-paid health insurance plans would be taxed, and capital gains and dividends would be taxed at normal income tax rates.

More than $1 trillion in revenues would be raised every year for 10 years by eliminating 175-200 tax exemptions, credits and deductions — or “tax earmarks,” as Simpson calls them.

The federal gasoline tax would be raised by 15 cents per gallon.

Medicare recipients would pay a new $550 annual deductible and 20 percent co-pay. Starting in 2020, all federal health care spending would increase by no more than 1 percent above the economic growth rate.

The retirement age for Social Security would be raised incrementally to 69 over the next 65 years, and high-earning seniors would get reduced benefits, while a larger portion of payroll income would be subject to taxes. Benefits would eventually be cut by 25 percent for people earning at least $43,000 annually, and by 40 percent for people earning more than $100,000.

In Wyoming, 95,541 people received Social Security benefits in December 2009, according to program data, or almost 1 out of every 5 residents. About two-thirds of those recipients are age 65 or older.

The state's poverty rate of 9.5 percent is below the national level of 13.2 percent, according to U.S. Census data, and it ranks 19th in the nation in median household income.

Wyoming also has a broad middle class, ranking near the top on income equality. The state trails only Alaska and Utah in how evenly income is distributed among residents.

Simpson said the plan's recommendations for Social Security are set up as a separate proposal, and are not tied to overall deficit reduction.

Cuts in defense contracting sought under Defense Secretary Robert Gates would be doubled, and overseas military bases would be reduced by one-third. There would be a three-year freeze on non-combat military pay and Pentagon salaries.

The White House and Congress would trim their budgets by 15 percent, and non-military federal worker pay would be frozen for three years. The overall federal workforce would be reduced by 10 percent.

Funding for public radio and commercial space flight would be eliminated, and aviation security spending would be reduced for medium and large airports.

TAX REFORM

Critics at both ends of the political spectrum have taken issue with parts of the plan. But some pundits have said the proposal has made it possible for elected officials to discuss and consider a few radical ideas, including fundamental tax reform that would sweep away a dizzying array of loopholes that benefit the rich and special interests.

One of those eliminated deductions would raise the cost of doing business for Wyoming's oil, gas and mining industries. Tax deductions for accelerated depreciation and for domestic production — widely claimed by companies in mining and oil and gas production — would be ruled out.

Simpson said those are mature and stable industries that could adapt to the changes in the tax code, and that because the changes would come at the federal level, all states would see the same effects equally.

He said proposed tax reforms would broaden the nation's tax base and make America a more competitive place to do business compared to other countries with lower corporate tax rates.

But eliminating scores of tax deductions doesn't sit well with some groups, including Americans for Tax Reform, an advocacy group founded by conservative Grover Norquist.

The group, which “opposes all tax increases as a matter of principle,” has said the deficit reduction plan amounts to a trillion-dollar tax hike. Simpson said the plan lowers tax rates and simplifies the tax code, but generates more than $1 trillion per year by doing away with tax expenditures — special exemptions, credits and deductions.

“All of them are really spending in disguise,” Simpson said. “They suck money away from the federal government. So we started calling them tax earmarks.”

Eliminating tax expenditures — the numerous popular income tax deductions, exemptions and credits — was “embraced by everyone” during creation of the plan, he said.

“The bulk of those things are used by only 1 percent of the top-income people in the U.S. Of the 400 richest people in America, they pay a 16-percent average income tax rate,” Simpson said. Many middle-class Americans pay an effective tax rate that is much higher, in some cases twice as much.

“Grover Norquist, in another couple of years, is going to be irrelevant. You can't save America without some kind of revenue. You can't fight two wars and not have something to support it. You can't run a country that way,” he said.

Simpson called Norquist “the boy who cried wolf,” and said he enjoys sparring with the conservative advocate who cites Ronald Reagan as his hero.

“I remind him that Ronald Reagan raised taxes 11 times,” Simpson said.

“A zealot is one who, having forgotten his purpose, redoubles his efforts,” he said.

Gov. Dave Freudenthal said last week that he had not had a chance to carefully review the final plan, but admired members of the panel for their efforts.

“What they're arguing for is shared sacrifice as a theory of how to get out of this, and all they've gotten is a shared beating,” he said.

“At the end of the day, we're all going to have to accept reduced services, we're all going to have to pay more. It's no different than the family budget,” Freudenthal said.

Based on comments from pundits and advocates he has seen on the news, Freudenthal said much of the debate over the plan appeared to “go back to the old deal of everybody being in favor of cutting the other guy or in favor of someone else paying taxes.”

He said it was “incredibly important” that Congress address the deficit issue.

(Ruffin Prevost is managing editor of WyoFile, a news organization that provides in-depth reporting about Wyoming people, places and policy. For more of Prevost's ‘Moment of Truth' coverage, visit www.wyofile.com.)